No-Action Letter for Microsoft Permitted Exclusion of Vague Shareholder Voting Proposal.
In Microsoft Corp., 2016 BL 339357 (Oct. 7, 2016), Microsoft Corporation (“Microsoft”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit omission of a proposal submitted by Kenneth Steiner (“Shareholder”) requesting that the board “not take any action whose primary purpose is to prevent the effectiveness of shareholder vote without a compelling justification for such action.” The SEC agreed to issue a no action letter allowing for the exclusion of the proposal under Rule 14a-8(a)(3).
Shareholder submitted a proposal providing that:
RESOLVED, the board shall not take any action whose primary purpose is to prevent the effectiveness of shareholder vote without a compelling justification for such action.
Microsoft sought exclusion under subsections (a), (i)(3) and (i)(7) of Rule 14a-8.
Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. In addition, the Rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC.
Rule 14a-8(a) permits exclusion of shareholder proposals that “seek no specific action, but merely purport to express shareholder views.” Proposals that do not request specific action it the future, but act prophylactically, are subsequently excluded.
Rule 14a-8(i)(3) permits the exclusion of proposals or supporting statements that are contrary to any of the SEC’s proxy rules or regulations. The subsection applies to proposals that may be inconsistent with Rule 14a-9, which prohibits materially false or misleading statements. 17 CFR 240.14a-9. In addition, this subsection permits the exclusion of proposals that are vague and indefinite, rendering the company’s duties and obligations unclear.
Rule 14a-8(i)(7) permits the exclusion of proposals that relate to a company’s “ordinary business” operations. This section understands “ordinary business” to mean the issues that are fundamental to a company’s management abilities on a daily basis. Thus, proposals dealing with issues relating to ordinary business are not subjected to shareholder oversight. For additional explanation of this exclusion, see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, and Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7).
Microsoft argued the proposal should be excluded under subsection (a) because the proposal was not a proposal for the purposes of Rule 14a-8. The proposal did not request that the board take a specific action in the future. Instead, the proposal only “directs the board to decline to take action.” Thus, the proposal does not seek any specific action and may be excluded under Rule 14a-8(a).
Microsoft further argued the proposal should be excluded under subsection (i)(3) because the proposal was impermissibly vague and indefinite. Specifically, Microsoft argued the proposal was so vague that “neither the company nor its shareholder can determine what types of conduct the Submission is intended to address.”
Finally, Microsoft asserted the proposal should be excluded under subsection (i)(7) because the proposal related to the Company’s ordinary business operations. Even if there were board actions in the proposal that may implicate social policy issues, the proposal encompassed activities regarding the company’s interactions with shareholders, which relates to its ordinary business operations.
In response, Shareholder argued the board of directors undermined the shareholder franchise (i.e. adopting complex notices, requiring long forms that often demand proprietary information to the board, etc.), which results in deterred shareholder votes and costly litigation to Microsoft.
The SEC agreed with Microsoft’s reasoning, and concluded it would not recommend enforcement action if Microsoft omits the proposal from its proxy materials in reliance on Rule 14a-8(i)(3). The staff noted “neither shareholders nor the company would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires.” The staff did not address Microsoft’s alternative bases for omission.
The primary materials for this post can be found on the SEC website.